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How the Global Wheat Shortage May Impact the Pig Industry

by 5m Editor
6 August 2010, at 12:00am

Based on current price predictions, the UK pig industry will experience a return to negative returns from November this year, according to a briefing document from BPEX. Other countries are likely to be hit just as hard, either directly from the price rises in wheat, barley and soybeans or indirectly from competition for other feed ingredients.

Introduction

At present feed represents between 55 to 60 per cent of the total cost of production of pig meat for all European pig industries. Within the cost of feed the principal ingredients are the cereals (wheat and/or barley) and soybean meal, which can account for up to 80 per cent of the ration. Clearly, therefore, the cost of pig feed rations and the total cost of pig production is highly sensitive to changes in the raw material prices of these commodities on the world market.

As has been well-documented in recent weeks and days, wheat prices have risen at their fastest rate since 1973 with markets witnessing the biggest jump in July from £103 to £143 per tonne due to concerns of drought conditions throughout the major cereal-growing areas of Europe and Russia and the resultant impact on yields.

This short briefing note aims to quantify the impact of recent price rises on the cost of pig meat production and forecast future movements in commodity prices and how this may impact upon the pig meat supply chain.

Summary

Feed represents up to 60 per cent of the current costs of pig production of which the main ingredients are wheat, barley and soya. During July, global and domestic wheat prices increased almost 40 per cent and further quoted prices forecast further increases.

Based on current and forecast prices for wheat, barley and soya – which are the main ingredients in pig feed – it is anticipated that the cost of English pig production will rise from 137.2p per kg in June 2010 to 146.35 per kg in November 2010.

The impact of these increases in cost of production is that English pig producers will move into negative returns for every pig slaughtered subject to future movements in the DAPP.

This situation is not unique to the English pig industry. All European pig industries are faced with the same challenges from the global feed market and the impact on their profitability is identical, subject to their individual pig price movements in the near future.

Overview of Commodity Markets – Wheat, Barley and Soybeans

Wheat

At the start of 2010, the global wheat market was in a heavily supplied bearish state. With ending stocks for the '09/10 season estimated at near 200 million tonnes and a forecast third-highest harvest on record, the supply side dominated the market. However, the weather has yet again thrown a spanner in the works. With the worst drought for 130 years hitting Russian grain crops, the world has become very nervous in a short space of time about the availability of wheat from Russia and the Black Sea region. Information from the region is not particularly transparent and so rumour and conjecture on the impact of the heatwave on grain crops have been key market drivers. The nervousness in the market has been spurred on by increased investment fund activity and a weaker US dollar over the past month.

The main driver has been the European market with MATIF wheat in Paris up €57.50 per tonne over the past month, to close on 2 August at €207.25. UK prices have followed with new-crop LIFFE wheat futures for November 2010 gaining over £40 per tonne through July alone. Wheat futures prices for July 2011 delivery increased by 36 per cent since the start of June.

Wheat prices in the US hit near two-year highs recently, with CBOT wheat standing at $254.7 per tonne on 2 August, some $75 higher than a month earlier. The wheat prices have surged above the maize price in the US, with wheat now at a $106 per tonne premium above maize. As a result, this price spread makes wheat in the US less attractive into feed rations and there is the potential for feed wheat demand to lessen.

Barley

The barley market has very much followed the price surges in the wheat market over recent weeks. The concerns over the poorer-than-expected yields in Europe and the expected lower crops in the Black Sea region have prompted feed compounders across Europe to lobby the EU to release barley stocks from intervention to alleviate the expected lower supply. However, in mid-July, the EU announced that it had no plans to allow the release of barley intervention from stocks but that it would continue to monitor the situation.

The latest estimates of barley production in Europe are at 54.1 million tonnes, well down from 61.8 million tonnes produced a year ago. The main reason for the lower production is firstly a lower planted area from barley with gross margins looking poor in comparison to feed wheat and oilseed rape; and secondly, the heat-wave through June and July reducing the crops yield potential. Europe is still expected to carry in over 11 million tonnes of barley in commercial stocks.

Soybean meal

The soybean meal market has been supported by spill-over support from buoyant grain prices over recent weeks. The market has also seen support from tight supplies in North America and a strong demand for raw bean imports into China. Soybean meal prices have been on an upward trend since mid-March, hitting highs of $350 per tonne in early July. The UK market, and subsequent prices, will be very much influenced by these global factors. soybean meal prices in the UK have gained from £275 per tonne in early March to £300 in late July. However, the strengthening of UK sterling against the US dollar over recent weeks will have the effect of making US dollar denominated imports into the UK cheaper in sterling terms and as such will partly negate the price rises seen in US markets.

Looking forward, the soybean market is expecting a record US crop this year, with the 2010 harvest currently estimated at between 91 and 93 million tonnes. The US has seen very beneficial growing conditions this season and the crop is currently forming yield with very little weather concerns. The soybean market now awaits the final size of this US crop to then gauge the relative supply availabilities through 2010/11. However, the global supply and demand within the soybean market remains robust. As in 2010/11, global soybean production is estimated at 251 million tonnes (259 million tonnes in 2009/10); demand is seen 12 million tonnes higher than the season prior at 247.6 million tonnes, with Chinese import demand seen at one-fifth of world production at 50 million tonnes. So, the potential record bean crop in the US gains more significance as demand is forecast to increase in 2010/11.

Current and Forecast Cost of Production


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"Even if producer prices maintain their current value, the industry is forecast to be making a loss by the final quarter of 2010."

The cost of production in the pig industry improved during 2009 mainly due to reduced input costs of feed and improvements in physical performance. During 2009, the average cost of pig production was 127.9p per kilo, a seven per cent reduction compared with a year earlier. Despite efficiencies in terms of breeding herd prolificacy and growth rates, the industry has been exposed to higher energy, labour and building costs. Following a prolonged period of negative margins for the industry, returns achieved during 2009 allowed the opportunity for greater investment in new buildings.

However, costs of production remain dominated by feed. Costs of production have increased during 2010 and in July the estimated cost of production was 137p per kg.

During 2009, feed accounted for 52 per cent of production costs, a reduction from 56 per cent a year earlier. However, in July 2010, feed was estimated to account for 57 per cent of total pig production costs.

As new feed contracts are being negotiated, there is concern that the industry will once again become loss-making as, at the time of writing, futures prices continue to rise at a time where the producer price has fallen for five consecutive weeks, following a seasonal trend. Taking into account the futures prices and the likely knock-on effect to feed rations, the return to producers is important in terms of maintaining a sustainable business. Even if producer prices maintain their current value, the industry is forecast to be making a loss by the final quarter of 2010.

This current situation is not limited to the UK industry. The grain market is global and other European pig producing nations are experiencing a concentrated impact of increased input costs. EU member states have not experienced similar profitability that the UK has experienced over the last 18 months. As a result, the sustainability of many European pig producers will come into question if higher feed prices are realised.

Conclusions

Based on current and forecast prices for wheat, barley and soya which are the main ingredients in pig feed, it is anticipated that the cost of English pig production will rise from 137.2p per kg in June 2010 to 146.35p per kg in November 2010.

The impact of these increases in cost of production is that English pig producers will move into negative returns for every pig slaughtered subject to future movements in the DAPP.

This situation is not unique to the English pig industry. All European pig industries are faced with the same challenges from the global feed market and the impact on their profitability is identical, subject to their individual pig price movements in the near future.

August 2010